TITLE exempt-filings

The Commissioner of Insurance has adopted (i) rating rules in the Homeowners Section and Dwelling Section of the Texas Personal Lines Manual (Manual) to provide for mandatory credits under a homeowners policy and dwelling policy for roof coverings, other than metal roof coverings, on residential risks which meet the Underwriters Laboratories (U.L.) test criteria under U.L. Standard 2218 that establishes a classification system for measuring the impact resistance of roof coverings; and (ii) a form entitled "Roofing Installation Information and Certification for Reduction in Residential Insurance Premiums" (referred to herein as "Certificate of Installation") to be completed by the installer of a roof covering product on a residential risk or the general contractor supervising the construction or repair of a residential risk which meets the test criteria under U.L. Standard 2218. The Manual rules and form were proposed by Department staff in a petition filed on September 25, 1997. Notice of the proposal (Reference Number P-0997-30-I) was published in the October 10, 1997, issue of the Texas Register (22 TexReg 10183). The Manual rules and form were considered at a public hearing on December 3, 1997, at 10:00 a.m., under Docket Number 2309 in Room 100 of the Texas Department of Insurance Building, 333 Guadalupe Street in Austin, Texas.

The Commissioner has adopted, with changes to the proposal as noticed in the Texas Register , new rating rules in the Homeowners and Dwelling Sections of the Texas Personal Manual to establish mandatory premium credits for residential property insurance policies for the installation of an impact resistant roof covering that meets U.L. Standard 2218 ( the term "U.L. Standard 2218" as used throughout this Order shall be read to include any other impact test standard approved by the Texas Department of Insurance unless the context clearly indicates otherwise). The Commissioner has adopted, with changes to the proposal as noticed in the Texas Register , the Roofing Installation Information And Certification For Reduction In Residential Insurance Premiums form.

The adopted new rules to sections of the Manual are as follows: 1) In the Homeowners Section, Manual Rule VI-N, entitled "Mandatory Roof Covering Credits" is added. 2) In the Dwelling Section, Manual Rule VI-K, entitled "Mandatory Roof Covering Credits" is added.

These rules provide mandatory premium credits of up to 35% for homeowners and up to 46% for dwelling policies for the installation of a roof covering that meets the classifications specified in U.L. Standard 2218. The amount of premium credit applied to a policy depends on the type of policy (homeowners or dwelling), the classification of the roof covering installed on the risk, and the rating territory in which the risk is located.

The mandatory roofing credits adopted by the Commissioner are based on the following analysis and methodology. Staff utilized ten years of homeowners and dwelling loss data categorized by cause of loss and by territory. A ten year sampling of data was selected in order to be consistent with the territorial ratemaking procedure that was used for setting the most recent residential property benchmark rates. In addition to the cause of loss data utilized to isolate wind and hail losses, claims experts who specialize in insurance adjusting for hail damage were interviewed to determine the overall extent of damage to roof coverings in hail storms compared to the total damage to structures in hail storms.

In order to produce the hail damage roof credits for homeowners, each year of data was adjusted to take into account loss trends, using trend factors underlying the latest benchmark rates. Losses were also adjusted by rating territory and by year to remove the effects of catastrophic events during the experience period and loaded with the thirty year territorial catastrophe loads underlying the latest benchmark rates, except as noted in the paragraph that follows.

No adjustment was made for catastrophes in the first or second tier seacoast counties for the reasons that follow. Many of the extraordinary losses along the seacoast, especially in Nueces county, were due to foundation claims. These are considered regular losses rather than catastrophic events. Much of the catastrophic loading along the seacoast is heavily influenced by hurricane losses, which would not be affected by a hail resistant roof. Since there were few hurricane losses during the experience period, this has the effect of tempering the wind/hail ratio slightly. Additionally, the wind/hail ratio for the seacoast area was tempered by an additional 50% to take into account the rarity of hailstorms in that region.

Since the catastrophe adjusted wind/hail ratio for a given territory may reflect episodic instances of catastrophe losses rather than long term exposure, the territories were grouped into "zones" in order to enhance credibility. Zones were created based on the indicated wind/hail ratios and geographic location. For homeowners, since Tarrant, Nueces, and El Paso counties showed significantly different experience when compared to surrounding territories, a separate zone was established for each of these counties.

Based on Staff's interviews with hail claims specialists, it was determined that approximately 75-85% of wind/hail losses are roof damage. It was estimated that a Class 4 roof covering, which is able to withstand 2 inch hail, would eliminate approximately 75% of the wind/hail losses that are roof damage. A Class 3 roof covering, which is able to withstand 1 3/4 inch hail, is estimated to eliminate approximately 55% of hail roof damage; a Class 2 roof covering, which is able to withstand 1 1/2 inch hail, is estimated to eliminate approximately 35% of hail roof damage; and a Class 1 roof covering, which is able to withstand 1 1/4 inch hail, is estimated to eliminate approximately 20% of hail roof damage.

Based on the methodology stated above and taking into account the statewide ratio of wind/hail losses to total losses, the elimination of loss adjustment expenses and variable expenses due to eliminated claims, and fixed expenses a state wide credit was determined for each class of roof. The statewide credits were then allocated to each zone based on the catastrophe adjusted zone ratio of wind/hail losses to total losses.

The hail damage roof credits for dwelling extended coverage were calculated in an analogous manner to the homeowners credits, taking into account differing expenses and catastrophe adjusted ratios of wind/hail losses to total losses.

Under the adopted manual rules, the credits are to be applied to the basic premium for homeowners policies and to the basic premium for extended coverage for dwelling policies. The mandatory credits apply only where the existing roof covering on a residence is replaced with a new roof covering meeting U.L. Standard 2218 or where a roof covering meeting U.L. Standard 2218 is installed on new residential construction.

The adopted Manual rules further provide that in order for mandatory roof covering credits to be applicable to homeowners and dwelling insurance, roof coverings, other than metal roof coverings, meeting the requirements of U.L. Standard 2218 which are installed on and after January 1, 1999, must meet certain labeling requirements as specified in the rules. Individual shingles, tiles, shakes, panels, sheets, etc. of roof covering must bear the Underwriters Laboratories label or the label of a testing laboratory approved by the Department indicating the classification of the product under U.L. Standard 2218, the manufacturer's name, the date the product was manufactured, and the brand name of the product. For those roof covering products installed prior to January 1, 1999, only the package containing the roof covering products will be required to be labeled with the same information as will be required for the individual shingles, tiles, shakes, panels, sheets, etc.

As a result of comments on the proposal, the Commissioner has adopted the Manual rules with changes to the rules as proposed. The following changes were made to rating rule VI.-N in the Homeowners Section and rating rule VI.-K in the Dwelling Section: 1. A paragraph was added to item number 1 to clarify that the credits will be reviewed as soon as credible statistical data is available but not later than five years from the effective date of the credits and that the credits may be modified based on this new data. 2. A note was added to item number 1 to clarify that the Department will accept other impact resistance testing standards approved by the Department and that the impact resistance testing may be conducted by any testing facility that is approved by the Department. 3. An additional sentence was added to item number 3 to clarify that the Certificate of Installation is solely for the purpose of obtaining a premium credit and it is not to be construed as any type of express or implied warranty. This change was necessary to address the concerns of manufacturers and installers of impact resistant roofing materials that by completion of the Certificate of Installation a warranty was being made with respect to hail damage. 4. Additional language was added to item number 5 to clarify that with respect to product labeling the Department will accept the U.L. label or the label of any testing laboratory approved by the Department. This change was necessary to clarify that U.L. is not the only testing laboratory that can test and label impact resistant roofing products. 5. Language was deleted and additional language was added to item number 6 to allow insurers to give premium credits on an optional basis to homeowners who installed impact resistant roof coverings prior to February 1, 1998. These changes were necessary because there are many homeowners who have already taken the initiative to install roofing materials on their homes, which insurers may consider to be impact resistant, and it would be unfair for this group not to have the opportunity to receive the credit. 6. A new paragraph 7 was added to clarify that the certification process used in the roof credits program is solely for the purpose of qualifying for a reduction in residential insurance premium and it is not intended to create any type of express or implied warranty by the manufacturer, supplier, or installer.

The adopted Manual rules provide for the use of a promulgated Certificate of Installation. The Certificate of Installation will be provided to the policyholder by the installer of the roof covering or the general contractor supervising the construction or repair of a residential risk. All information on the Certificate of Installation is to be completed and signed by the individual or general contractor responsible for the installation of the roof covering. Under the adopted manual rules, the policyholder must present the Certificate of Installation along with that portion of the material packaging containing the Underwriters Laboratories label and manufacturer's name to an insurer for the application of the appropriate mandatory roof covering credit. However, the presentation of the Certificate of Installation will not preclude the insurer from inspecting the risk for verification of the roof covering installation.

The Certificate of Installation will be completed by the installer of a roof covering product or the general contractor supervising the construction or repair of the residential risk, it will certify that the roof covering meets the Underwriters Laboratories test criteria under U.L. Standard 2218, and it will indicate the appropriate classification of the roof covering. The Certificate of Installation along with that portion of the material packaging containing the Underwriters Laboratories label and manufacturer's name will become the document verifying that the roof covering meets the necessary requirements of U.L. Standard 2218, and the policyholder will be required to provide a copy of the Certificate of Installation and the packaging to an insurer to obtain the mandatory roof covering credit.

As a result of comments on the proposal, the Commissioner has adopted the Certificate of Installation form with changes to the form as proposed. The Certificate of Installation was adopted with the following changes: 1. The title of the Certificate of Installation form was changed to delete the words "Impact Resistant." This change was made at the request of a commenter who expressed concern that this language might lead consumers to believe that the roofing products being installed were hail proof. 2. Additional language was added to the section entitled "Notice To The Homeowner" to clarify that the purpose of the Certificate of Installation is to enable homeowners to obtain premium credits and that completion of the form does not constitute a warranty of the product by the manufacturer, supplier, or installer. This change was made in response to concerns by manufacturers, suppliers, and installers that by completion of the Certificate of Installation consumers were being led to believe that a warranty regarding hail resistance of the roofing product was being made. 3. A statement is being added to the form alerting homeowners and installers to the fact that any misrepresentation relating to the completion of the form constitutes insurance fraud. This change was made to dissuade those who might be tempted to make misrepresentations on the form in order to obtain the premium credit.

The proposed rules are necessary to provide mandatory roof covering credits for residential risks which have a roof covering, other than a metal roof covering, that meets the Underwriters Laboratories test criteria under U.L. Standard 2218. Wind and hail causes substantial damage to residential property in Texas and on the average accounts for approximately 40% of all residential insured property losses in the state. Hail produces the most damage directly to the roof covering of a residence. The hail resistance of residential roof covering materials has not been markedly improved in the past twenty years. Until the development of the Underwriters Laboratories test for impact resistance of roof coverings under the U.L. Standard 2218, there has been no generally recognized or accepted independent method of testing the impact or hail resistance of residential roof covering materials. In the absence of a recognized testing method, there have been no grading systems established by the roof covering materials manufacturing industry and, therefore, consumers have not had any means of determining the ability of a particular type of roof covering to withstand hail.

Many areas in the State of Texas are exposed to severe hail storms causing hundreds of millions of dollars in losses with roof coverings on residential risks sustaining the majority of the damage and losses. The severe hail storms which have occurred in recent years are causing an undesirable effect on the residential property insurance market in Texas. In the areas of Texas where hail damage occurs most frequently, residential property owners are having problems with obtaining residential property insurance from licensed insurers. This lack of availability compels consumers to seek insurance in the surplus lines market at much higher rates or to forego purchasing residential property insurance. Insurers are restricting their writings in the areas where hail occurs most frequently because their exposure of risk in these areas is too great in the event of a major hail storm. Excessive losses due to hail storms have caused rates to increase for specific areas of Texas, and any continued pattern of hail storms causing severe damage will continue to produce increased insurance rates. Although there is no immediate solution to the problems created by increasing losses from hail storms, one long term solution is to find ways to reduce the losses that are caused by hail storms. The use of improved more durable building products is an important method of mitigating the losses that are caused by hail storms.

The Residential Property Loss Mitigation Advisory Committee (Advisory Committee) was appointed by the Commissioner to seek ways to mitigate losses as a means of reducing insurance costs to consumers and making residential insurance more available from insurers. The Advisory Committee was required to make recommendations to the Commissioner on appropriate methods of accomplishing a reduction in losses to residential property. The Advisory Committee has focused its review of mitigating losses to residential property in a number of areas, however, the single area that provides the greatest potential for corrective measures to mitigate losses is in the area of damage and loss from hail storms.

The component of a residential risk with the greatest exposure to hail damage is the roof, and more specifically the roof covering. The more effective a roof covering product is in withstanding the impact of hail and preventing the rupture of the roof membrane in a hail storm, the less damage the hail storm will cause. There is a need to establish a means of grading the impact resistance of roof covering products, to provide incentives to consumers to purchase the more impact resistant roof covering products, and for manufacturers to produce such products. The first step in this process is the establishment of a grading system to gauge the impact resistance of roof covering products and this has been accomplished by the development of an impact resistance test by the Underwriters Laboratories known as U.L. Standard 2218. In simplistic terms, this test uses steel balls of varying sizes which are dropped from varying heights under controlled conditions as the means of determining the impact resistance of various roof covering products. Though this test does not perfectly simulate damage that can be caused by the impact of hail stones, it is a reasonable test to use in determining the impact resistance of roof covering products and was developed by a well recognized and respected testing laboratory. To ensure that manufacturers of roof covering products will manufacture products that meet such a test, it is important to provide consumers with incentives to purchase roof covering products meeting U.L. Standard 2218. The adopted new rules provide the incentives to consumers to purchase roof covering products that meet U.L. Standard 2218 by offering a premium credit on homeowners and dwelling policies that insure risks having a roof covering installed which meets U.L. Standard 2218.

The Commissioner has jurisdiction of this matter pursuant to the Insurance Code, Articles 5.35, 5.101, 5.96, and 5.98.

The Manual rules and form as adopted by the Commissioner of Insurance are on file in the Chief Clerk's Office of the Texas Department of Insurance under Reference Number P-0997-30-I and are incorporated by reference in the Manual by Commissioner's Order Number 98-0069

This notification is made pursuant to the Insurance Code, Article 5.96, which exempts action taken under Article 5.96 from the requirements of the Administrative Procedure Act (Government Code, Title 10, Chapter 2001).

Consistent with the insurance Code, Article 5.96 (h), prior to the effective date of this action, the Texas Department of Insurance will notify all insurers affected by this action.

TRD-9800671

Caroline Scott

General Counsel and Chief Clerk

Texas Department of Insurance

Filed: January 15, 1998